UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ============================================================= FORM 10-Q/A AMENDMENT NO. 1 TO THE QUARTERLY REPORT (Mark One) [X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. For the quarterly period ended MARCH 31, 1999. or [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. For the transition period from _______to _______. Commission File Number 0-16611 ------- GLOBAL SPORTS, INC. ------------------- (Exact name of registrant as specified in its charter) DELAWARE 04-2958132 ------------------------------------------------------------------------------ (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification Number) 1075 FIRST AVENUE, KING OF PRUSSIA, PA 19406 ---------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) 610-265-3229 ------------ (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of May 14, 1999: Common Stock, $.01 par value 12,116,253 ---------------------------- ------------------------ (Title of each class) (Number of Shares) GLOBAL SPORTS, INC. FORM 10-Q/A AMENDMENT NO. 1 TO THE QUARTERLY REPORT FOR THE QUARTER ENDED MARCH 31, 1999 TABLE OF CONTENTS PAGE PART I -- FINANCIAL INFORMATION Item 1. Financial Statements: Condensed Consolidated Balance Sheets as of March 31, 1999 and December 31, 1998 3 Condensed Consolidated Statements of Operations for the three-month periods ended March 31, 1999 and 1998 4 Condensed Consolidated Statements of Cash Flows for the three-month periods ended March 31, 1999 and 1998 5 Notes to Condensed Consolidated Financial Statements 6-10 Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition 11 Item 3. Quantitative and Qualitative Disclosures About Market Risk 13 PART II -- OTHER INFORMATION Item 1. Legal Proceedings 14 Item 2. Changes in Securities and Use of Proceeds 14 Item 3. Defaults on Senior Securities 14 Item 4. Submission of Matters to a Vote of Security Holders 14 Item 5. Other Information 14 SIGNATURES 15 -2- PART I -- FINANCIAL INFORMATION ITEM 1 -- FINANCIAL STATEMENTS GLOBAL SPORTS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) MARCH 31, 1999 (AS RESTATED - DECEMBER 31, SEE NOTE 9) 1998 -------------- ------------- ASSETS Current assets: Cash and cash equivalents $ 965,703 $ 83,169 Net assets of discontinued operations 45,000,068 41,127,839 Prepaid expenses and other current assets 1,944,062 599,224 -------------- ------------- Total current assets 47,909,833 41,810,232 Property and equipment, net of accumulated depreciation and amortization 2,995,058 2,988,714 Other assets 240,211 253,626 -------------- ------------- Total assets $51,145,102 $45,052,572 ============== ============= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current portion - notes payable, banks $24,442,675 $ -- Current portion - capital lease obligation, related party 131,111 127,966 Accounts payable and accrued expenses 3,968,245 5,030,844 Subordinated notes payable 1,805,841 1,805,841 -------------- ------------- Total current liabilities 30,347,872 6,964,651 Notes payable, banks - 18,812,156 Capital lease obligation, related party 2,147,284 2,181,265 Mandatorily redeemable preferred stock 100 100 Commitments and contingencies Stockholders' equity: Preferred stock, $0.01 par value, 1,000,000 shares authorized; 10,000 shares issued as mandatorily redeemable preferred stock -- -- Common stock, $0.01 par value, 20,000,000 shares authorized, 13,109,348 and 12,994,464 shares issued in 1999 and 1998; 12,040,262 and 11,925,378 shares outstanding in 1999 and 1998 131,093 129,947 Additional paid in capital 18,224,147 17,111,166 Accumulated other comprehensive loss -- (47,431) Retained earnings 508,423 114,535 -------------- ------------- 18,863,663 17,308,217 Less: Treasury stock, at cost 213,817 213,817 -------------- ------------- Total stockholders' equity 18,649,846 17,094,400 -------------- ------------- Total liabilities and stockholders' equity $51,145,102 $45,052,572 ============== ============= The accompanying notes are an integral part of these condensed financial satements. -3- GLOBAL SPORTS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) THREE MONTHS ENDED MARCH 31, ------------------------------------- 1999 (AS RESTATED - SEE NOTE 9) 1998 ---------------- --------------- Costs and expenses: General and administrative $ 816,866 $ 673,522 Stock-based compensation 398,266 - Interest, net 57,013 58,892 ---------------- --------------- Total costs and expenses 1,272,145 732,414 ---------------- --------------- Loss from continuing operations before income taxes (1,272,145) (732,414) Benefit from income taxes (508,858) (292,966) ---------------- --------------- Loss from continuing operations (763,287) (439,448) Discontinued operations (Note 2): Income from discontinued operations (less provision for (benefit from) income taxes: 1999, $(176,575); 1998, $942,966) 1,157,175 1,971,021 ---------------- --------------- Net income $ 393,888 $1,531,573 ================ =============== Earnings (losses) per share-- basic and diluted: Loss from continuing operations $ (.06) $ (.04) Income from discontinued operations .09 .19 ---------------- --------------- Net income $ .03 $ .15 ================ =============== The accompanying notes are an integral part of these condensed financial statements. -4- GLOBAL SPORTS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) THREE MONTHS ENDED MARCH 31, -------------------------------- 1999 (AS RESTATED - SEE NOTE 9) 1998 -------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES: NET INCOME $ 393,888 $ 1,531,573 DEDUCT: INCOME FROM DISCONTINUED OPERATIONS 1,157,175 1,971,021 -------------------------------- LOSS FROM CONTINUING OPERATIONS (763,287) (439,448) ADJUSTMENTS TO RECONCILE NET LOSS FROM CONTINUING OPERATIONS TO NET CASH USED IN OPERATING ACTIVITIES: DEPRECIATION AND AMORTIZATION 137,755 116,890 STOCK-BASED COMPENSATION 398,266 - CHANGES IN OPERATING ASSETS AND LIABILITIES: PREPAID EXPENSES AND OTHER CURRENT ASSETS 69,429 (105,099) OTHER ASSETS 43,415 302,159 ACCOUNTS PAYABLE AND ACCRUED EXPENSES (2,191,790) 1,247,270 -------------------------------- NET CASH PROVIDED BY (USED IN) CONTINUING OPERATIONS (2,306,212) 1,121,772 NET CASH PROVIDED BY (USED IN) DISCONTINUED OPERATIONS (2,715,054) (2,487,747) -------------------------------- NET CASH USED IN OPERATING ACTIVITIES (5,021,266) (1,365,975) -------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES: CAPITAL EXPENDITURES (144,099) (204,977) -------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES: NET BORROWINGS UNDER LINES OF CREDIT 5,630,519 2,491,044 REPAYMENTS OF CAPITAL LEASE OBLIGATION (30,836) (27,982) PROCEEDS FROM ISSUANCE OF COMMON STOCK 478,216 1,920 COSTS OF DEBT ISSUANCE (30,000) -- -------------------------------- NET CASH PROVIDED BY FINANCING ACTIVITIES 6,047,899 2,464,982 -------------------------------- EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS -- 2,671 -------------------------------- NET INCREASE IN CASH AND CASH EQUIVALENTS 882,534 896,701 CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 83,169 98,881 -------------------------------- CASH AND CASH EQUIVALENTS, END OF PERIOD $ 965,703 $ 995,582 ================================ The accompanying notes are an integral part of these condensed financial statements. -5- GLOBAL SPORTS, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- NOTE 1 - BASIS OF PRESENTATION Global Sports, Inc. ("Global" or the "Company"), a Delaware corporation, is an e-Commerce company that is in the process of developing the internet businesses of several sporting goods retailers. On April 20, 1999, the Company formalized a plan to sell two of its businesses, the Branded division and the Off-Price and Action Sports division, in order to focus exclusively on its e- Commerce business. See Note 2. The accompanying condensed consolidated financial statements of Global have been prepared in accordance with generally accepted accounting principles for interim financial information and in accordance with the instructions for Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all information and footnotes required by generally accepted accounting principles for complete financial statements. The accompanying financial information is unaudited; however, in the opinion of the Company's management, all adjustments (consisting solely of normal recurring accruals) necessary for a fair presentation of the operating results of the periods reported have been included. The results of operations for the periods reported are not necessarily indicative of those that may be expected for a full year. This quarterly report should be read in conjunction with the financial statements and notes thereto included in the Company's audited financial statements as of December 31, 1998 as presented in the Company's Annual Report on Form 10-K/A. NOTE 2 - DISCONTINUED OPERATIONS On April 20, 1999, the Company formalized a plan to sell two of its businesses, the Branded division and the Off-Price and Action Sports division, in order to focus exclusively on its e-Commerce business. The Branded division designs and markets the RYKA and Yukon footwear brands. The Off-Price and Action Sports division is a third-party distributor and make-to-order marketer of off- price footwear, apparel and sporting goods. Accordingly, for financial statement purposes, the assets, liabilities, results of operations and cash flows of these divisions have been segregated from those of continuing operations and are presented in the Company's consolidated financial statements as discontinued operations. The accompanying financial statements have been reclassified to reflect this presentation. Net interest expense related to the lines of credit and debt to be assumed by the successor businesses of $264,544 for the three- month period ended March 31, 1999 has been allocated to the pre-measurement date income from discontinued operations. The discontinued operations components of amounts reflected in the income statements and balance sheets are as follows: FOR THE THREE MONTHS ENDED MARCH 31, -------------------------- 1999 1998 -------------------------- INCOME STATEMENT DATA: Net sales $33,723,869 $28,148,378 ========================== -6- GLOBAL SPORTS, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- MARCH 31, 1999 DECEMBER 31, 1998 ------------------------------------ BALANCE SHEET DATA: Cash $ - $ 772,916 Accounts receivable 40,592,316 36,782,732 Inventory 17,472,869 20,954,168 Property and equipment 1,425,612 1,397,189 Goodwill and intangibles 16,307,535 16,507,073 Other assets 1,587,758 936,293 Accounts payable and accrued expenses (17,510,117) (16,192,954) Subordinated notes payable (1,499,302) (1,999,065) Notes payable, banks (10,316,939) (14,823,955) Notes payable, other (3,059,664) (3,206,558) ------------------------------------ Net assets of discontinued operations/(1)/ $ 45,000,068 $ 41,127,839 ==================================== /(1)/ Included in current assets. Notes Payable of Discontinued Operations Included in Notes Payable, Banks of discontinued operations are amounts outstanding under a line of credit of approximately $20,000,000 for use by the Gen-X Companies, which is available for either direct borrowing or for import letters of credit. The loan bears interest at prime plus one half percent and is secured by a general security agreement covering substantially all of the Gen-X Companies' assets. At March 31, 1999, draws of $10,000,000 plus net bank overdrafts of $173,607 were committed under this line and, based on a net cash position and available collateral and outstanding import letters of credit commitments, an additional $4,331,613 was available for borrowing. For the three-month period ended March 31, 1999, interest expense of discontinued operations included $226,232 related to this line of credit. Notes Payable, Banks of discontinued operations also includes a mortgage note secured by land and building in Ontario, Canada of $316,939. The mortgage note bears interest at the bank's cost of funds plus 2.5% and matures on August 15, 2009. For the three-month period ended March 31, 1999, interest expense of discontinued operations included $8,298 related to this mortgage note. Notes Payable, Other of discontinued operations includes an outstanding loan payable for $1,500,000. The original loan of $2,000,000 is payable in equal quarterly installments of $100,000, which commenced on March 31, 1998, and bears interest at the prime lending rate. For the three-month period ended March 31, 1999, interest expense of discontinued operations included $30,576 related to this loan. Notes Payable, Other of discontinued operations also includes $1,000,000 of promissory notes payable to the former shareholders of Lamar. The notes are payable in five equal annual installments and bear interest at 6% per annum, the first payment of which will be made in July 1999. For the three-month period ended March 31, 1999, interest expense of discontinued operations included $32,519 related to these notes. At the time of the acquisition, Lamar also executed a note payable in the principal amount of $553,447, plus $74,954 in accrued interest, for amounts owed to a shareholder. This note, which was assumed by the Company in the acquisition of Lamar, is payable in five equal annual installments and bears interest at 6% per annum. The amount outstanding on this note is $559,664. For the three-month period ended March 31, 1999, interest expense of discontinued operations included $9,093 related to this note. Upon closing the acquisition of the Gen-X Companies, the Company executed several subordinated notes payable with the former shareholders of the Gen-X Companies for an aggregate principal amount of $1,999,065 which is payable in four equal consecutive quarterly payments beginning March 31, 1999 or earlier. The first quarterly payment of $499,763 was made on March 31, 1999. These notes bear interest at 7% until December 31, 1998 and the prime lending rate thereafter. For the three-month period ended March 31, 1999, interest expense of discontinued operations included $39,229 related to these notes. -7- GLOBAL SPORTS, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- Employment Agreements of Discontinued Operations The Company has employment agreements with several of its officers of discontinued operations for an aggregate annual base salary of $340,500 plus bonuses and increases in accordance with the terms of the agreements. Terms of the agreements range from three to five years and are subject to automatic annual extensions. Purchase Commitments of Discontinued Operations As of March 31, 1999, outstanding purchase commitments of discontinued operations existed totaling $5,278,643, for which commercial import letters of credit have been issued. NOTE 3 - DEBT Notes Payable, Bank Under its primary loan agreement, as subsequently amended (the "Loan Agreement"), the Company has access to a combined credit facility of $40,000,000, which is comprised of the KPR Companies' credit facility of $35,000,000 and RYKA's credit facility of $5,000,000. The term of the Loan Agreement is five years expiring on November 19, 2002. The KPR Companies and RYKA have an interest rate choice of prime plus 1/4% or LIBOR (Adjusted Eurodollar Rate) plus two hundred seventy-five basis points. Under the Loan Agreement, both the KPR Companies and RYKA may borrow up to the amount of their revolving line based upon 85% of their eligible accounts receivable and 65% of their eligible inventory, as those terms are defined in the Loan Agreement. The Loan Agreement also includes 50% of outstanding import letters of credit as collateral for borrowing. In addition to the revolving lines of credit described above, the lender will over-advance to the Company an additional $3,000,000, over the existing collateral, for additional import letters of credit needed for seasonal production of new merchandise for the Spring 1999 and Fall 1999 seasons. Among other things, the Loan Agreement, as amended, requires the KPR Companies and RYKA to achieve annual earnings before interest, taxes, depreciation and amortization ("EBITDA") of $5,000,000 and it limits the Company's ability to incur additional indebtedness, make payments on subordinated indebtedness, make capital expenditures, sell assets, and pay dividends. At March 31, 1999, the Company was not in compliance with the EBITDA covenant. The Company obtained a waiver from the bank with respect to this covenant. Because there can be no assurance that the Company will be in compliance with this covenant for any period subsequent to March 31, 1999, the Company has classified the amounts outstanding under this line as a current liability. The Company plans to enter into negotiations with its lender to modify the terms of the Loan Agreement to return itself to compliance. At March 31, 1999, the aggregate amount outstanding under this line was $24,442,675. At March 31, 1999, based on available collateral and outstanding import letters of credit commitments, an additional $116,792 (including the seasonal over-advance) was available on this line for borrowing. The total interest incurred in connection with this facility was $491,505 for the three- month period ended March 31, 1999. Subordinated Notes Payable At March 31, 1999, the Company had $1,805,841 in outstanding subordinated notes payable held by its Chairman and CEO, plus accrued interest on such notes of $49,389 recorded in accrued expenses. This debt consisted primarily of a note representing undistributed Subchapter S corporation retained earnings previously taxed to him as the sole shareholder of the KPR Companies prior to the Reorganization. Interest accrues on such notes at the Company's choice of prime plus 1/4% or LIBOR (Adjusted Eurodollar Rate) plus two hundred seventy- five basis points. At March 31, 1999, the interest rate on these notes was 8 1/4% and interest recorded during the three-month period ended March 31, 1999 was $36,735. Based on its Loan Agreement, the Company is permitted to make continued regular payments of interest on the subordinated debt and to further reduce principal on a quarterly basis, commencing subsequent to the first quarter of 1998, in an amount up to 50% of the cumulative consolidated net income of the Company. During 1998, aggregate principal payments of $250,000 were made. No payments on this subordinated debt have been made to date in 1999. -8- GLOBAL SPORTS, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- NOTE 4 - RELATED PARTIES The Company is located in King of Prussia, Pennsylvania where it conducts a significant portion of its operations and warehouses inventory in a facility leased from the Company's Chairman and CEO. The lease has been accounted for as a capital lease, which resulted in $57,013 recorded to interest expense for the three-month period ended March 31, 1999. At March 31, 1999, the Company's investment in the capital lease was $1,955,747, which is included in property and equipment. The Company also has subordinated notes payable outstanding with its Chairman and CEO, as referred to in Note 3. NOTE 5 - EARNINGS (LOSSES) PER SHARE Earnings (losses) per share for all periods have been computed in accordance with SFAS No. 128, Earnings Per Share. Basic and diluted earnings (losses) per share is computed by dividing net income by the weighted average number of shares of common stock outstanding during the year. Outstanding common stock options and warrants have been excluded from the calculation of diluted earnings (losses) per share because their effect would be antidilutive. The amounts used in calculating earnings per share data are as follows: FOR THE THREE MONTHS ENDED MARCH 31, --------------------------- 1999 1998 --------------------------- Loss from continuing operations $ (763,287) $ (439,448) Income from discontinued operations 1,157,175 1,971,021 --------------------------- Net income $ 393,888 $ 1,531,573 =========================== Weighted average shares outstanding - basic and diluted 12,018,517 10,418,198 =========================== Weighted average common stock options and warrants having no dilutive effect 892,107 565,169 =========================== NOTE 6 - COMMITMENTS AND CONTINGENCIES Employment Agreements At March 31, 1999, the Company has employment agreements with several of its officers for an aggregate annual base salary of $837,500 plus bonus and increases in accordance with the terms of the agreements. Terms of such contracts range from three to five years and are subject to automatic annual extensions. E-Commerce At March 31, 1999, the Company has contractually committed to develop the internet businesses of several sporting goods retailers. The Company's failure to meet these commitments could result in a forfeiture of the contracts and the exclusive rights to certain future internet business. -9- GLOBAL SPORTS, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- NOTE 7 - COMPREHENSIVE INCOME Comprehensive income for the three-month periods ended March 31, 1999 and 1998 was as follows: THREE MONTHS ENDED MARCH 31, ---------------------- 1999 1998 ---------------------- Net income $393,888 $1,531,573 Foreign currency translation adjustment 47,431 2,671 ---------------------- Comprehensive income $441,319 $1,534,244 ====================== NOTE 8 - BUSINESS SEGMENTS As a result of the discontinued operations described in Note 2 to the financial statements, the Company considers itself to have one operating segment which is the development of the internet businesses of several sporting goods retailers. NOTE 9 - RESTATEMENT Subsequent to the issuance of the Company's consolidated financial statements for the three months ended March 31, 1999, the Company's management determined that the discount applied to the fair value of the Company's common stock issued as consideration for the Gen-X Companies in May 1998 should be decreased from 35% to 10%. As a result, the consolidated financial statements for the year ended December 31, 1998 were restated to reflect an additional $2,486,625 of consideration paid for the Gen-X Companies and additional amortization of goodwill of $77,707 for the period from May 12, 1998 through December 31, 1998 (the "1998 Restatement"). As a result of the 1998 Restatement, the consolidated financial statements for the three months ended March 31, 1999 have been restated from amounts previously reported to reflect the cumulative effect of the 1998 Restatement and additional amortization of goodwill of $31,083 for the three months ended March 31, 1999. A summary of the significant effects of the restatement is as follows: AS PREVIOUSLY REPORTED AS RESTATED ----------- ----------- AT MARCH 31, 1999: - ----------------------------------------------------- Net assets of discontinued operations $42,622,233 $45,000,068 Additional paid in capital 15,737,522 18,224,147 Retained earnings 617,213 508,423 FOR THE THREE MONTHS ENDED MARCH 31, 1999: - ----------------------------------------------------- Income from discontinued operations $ 1,188,258 $ 1,157,175 Net income 424,971 393,888 Earnings (losses) per share - basic and diluted: Loss from continuing operations $ (.06) $ (.06) Income from discontinued operations .10 .09 ----------- ----------- Net income $ .04 $ .03 =========== =========== -10- ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION FORWARD LOOKING STATEMENTS Certain information contained in this Form 10-Q/A contains forward looking statements (as such term is defined in the Securities Exchange Act of 1934 and the regulations thereunder), including without limitation, statements as to the Company's financial condition, results of operations and liquidity and capital resources and statements as to management's beliefs, expectations or options. Such forward looking statements are subject to risks and uncertainties and may be affected by various factors which may cause actual results to differ materially from those in the forward looking statements. Certain of these risks, uncertainties and other factors, as and when applicable, are discussed in the Company's filings with the Securities and Exchange Commission, including its most recent Form 10-K/A, a copy of which may be obtained from the Company upon request and without charge (except for the exhibits thereto). STRATEGIC BUSINESS DEVELOPMENTS This discussion summarizes the significant factors that affected Global's consolidated operating results and financial condition during the three months ended March 31, 1999. Over this period, the Company has undergone a significant transformation. Acquisition of the Gen-X Companies Prior to its decision to focus exclusively on its e-Commerce business, the Company acquired all of the outstanding and issued common stock of the Gen-X Companies in a purchase transaction effective May 12, 1998. The Company's reported results of operations for 1998 include those of the Gen-X Companies only from the date of acquisition through the end of the year. Discontinued Operations On April 20, 1999, the Company formalized a plan to sell two of its businesses, the Branded division and the Off-Price and Action Sports division, in order to focus exclusively on the development of new businesses. The Branded division designs and markets the RYKA and Yukon footwear brands. The Off-Price and Action Sports division is a third-party distributor and make-to-order marketer of off-price footwear, apparel and sporting goods. Accordingly, for financial statement purposes, the assets, liabilities, results of operations and cash flows of these divisions have been segregated from those of continuing operations and are presented in the Company's consolidated financial statements as discontinued operations. The accompanying financial statements have been reclassified to reflect this presentation. Global Sports Interactive On May 10, 1999, the Company announced the formation of a new subsidiary, Global Sports Interactive. Global Sports Interactive is an e-Commerce company that has entered into exclusive agreements to operate the internet businesses of multiple sporting goods retailers. The Company's failure to meet these commitments could result in a forfeiture of the contracts and the exclusive rights to certain future internet business and have a material adverse affect on the future results of operations and financial condition of the Company. Due to the fact that the Company had not, as of March 31, 1999, created this new division, results from continuing operations for the three-month period ended March 31, 1999 consist only of the operating expenses incurred during the period in connection with general and administrative purposes. Restatement Subsequent to the issuance of the Company's consolidated financial statements for the three months ended March 31, 1999, the Company's management determined that the discount applied to the fair value of the Company's common stock issued as consideration for the Gen-X Companies in May 1998 should be decreased from 35% to 10%. As a result, the consolidated financial statements for the year ended December 31, 1998 were restated to reflect an additional $2,486,625 of consideration paid for the Gen-X Companies and additional amortization of goodwill of $77,707 for the period from May 12, 1998 through December 31, 1998 (the "1998 Restatement"). As a result of the 1998 Restatement, the consolidated financial statements for the three months ended March 31, 1999 have been restated from amounts previously reported to reflect the cumulative effect of the 1998 Restatement and additional amortization of goodwill of $31,003 for the three months ended March 31, 1999. See Note 9 to the financial statements. -11- RESULTS OF OPERATIONS The Three-Month Period Ended March 31, 1999 Compared to The Three-Month Period Ended March 31, 1998 The following table sets forth, for the periods indicated, the results of continuing operations: THREE MONTHS ENDED MARCH 31, ----------------------------- 1999 1998 ----------------------------- Costs and expenses: General and administrative $ 816,866 $ 673,522 Stock-based compensation 398,266 -- Interest, net 57,013 58,892 ----------------------------- Total costs and expenses 1,272,145 732,414 ----------------------------- Loss from continuing operations before income taxes (1,272,145) (732,414) Benefit from income taxes (508,858) (292,966) ----------------------------- Loss from continuing operations (763,287) (439,448) Income from discontinued operations 1,157,175 1,971,021 ----------------------------- Net income $ 393,888 $1,531,573 ============================= Costs and Expenses Costs and expenses of continuing operations for the three-month period ended March 31, 1999 were $1,272,145. Operating expenses from continuing operations consisted of general and administrative expenses related to the day- to-day development and operating activities of the Company. Costs and expenses of continuing operations also includes charges for stock-based compensation of $398,266 for the three-month period ended March 31, 1999 primarily as a result of non-employee stock option grants. FINANCIAL CONDITION Cash Flows Historically, the operations of the Company have been financed by a combination of internally generated resources, equity transactions, subordinated borrowings, annual increases in the size of the bank credit facility and seasonal over-advances. Increases in the bank credit facilities for the KPR Companies and RYKA were required to fund the Company's increased investment in accounts receivable and inventory necessary to support the increases in revenue. As of March 31, 1999, the Company had net working capital of $17,561,961, which includes net assets of discontinued operations of $45,000,068. The Company used $5,021,266 in cash flows from operating activities for the three months ended March 31, 1999, whereas in the same period of the prior year the Company used $1,365,975 in cash flows from operating activities. Liquidity Under its primary loan agreement, as subsequently amended (the "Loan Agreement"), the Company has access to a combined credit facility of $40,000,000. The term of the Loan Agreement is five years. The loans have an interest rate choice of prime plus 1/4% or LIBOR (Adjusted Eurodollar Rate) plus two hundred seventy-five basis points. Under this credit facility, both the KPR Companies and RYKA may borrow up to the amount of their revolving line based upon 85% of their eligible accounts receivable and 65% of their eligible inventory, as those terms are defined in the Loan Agreement. The Loan Agreement also includes 50% of outstanding import letters of credit as collateral for borrowing. In addition to the revolving lines of credit described above, the lender will over-advance to the Company an additional $3,000,000, over the existing collateral, for additional import letters of credit needed for seasonal production of new merchandise for the Spring 1999 and Fall 1999 seasons. -12- Among other things, the Loan Agreement, as amended, requires the KPR Companies and RYKA to achieve annual earnings before interest, taxes, depreciation and amortization ("EBITDA") of $5,000,000 and it limits the Company's ability to incur additional indebtedness, make payments on subordinated indebtedness, make capital expenditures, sell assets, and pay dividends. At March 31, 1999, the Company was not in compliance with the EBITDA covenant. The Company obtained a waiver from the bank with respect to this covenant. Because there can be no assurance that the Company will be in compliance with this covenant for any period subsequent to March 31, 1999, the Company has classified the amounts outstanding under this line as a current liability. At March 31, 1999, the aggregate outstanding balance under this line was $24,442,675. At March 31, 1999, based on available collateral and outstanding import letters of credit commitments, an additional $116,792 (including the seasonal over-advance) was available on this line for borrowing. As of the closing of the Loan Agreement, the KPR Companies owed Michael Rubin, its Chairman and CEO, subordinated debt of $3,055,841 which is comprised of (i) a loan from Mr. Rubin to the KPR Companies in the principal amount of $851,440, plus accrued and unpaid interest on such loan of $180,517 through October 31, 1997 and (ii) a note in the principal amount of $2,204,401 representing undistributed Subchapter S corporation retained earnings previously taxed to him as the sole shareholder of the KPR Companies. No interest accrued on the note representing Subchapter S corporation earnings until December 15, 1997 at which time the interest began to accrue on such note at a choice of prime plus 1/4% or LIBOR (Adjusted Eurodollar Rate) plus two hundred seventy- five basis points. The Loan Agreement and the related Subordination Agreement allowed the Company to repay Mr. Rubin $1,000,000 of the subordinated debt principal and the accrued interest of $180,517 at the time of the closing of the Loan Agreement or within five days thereafter, subject to there being $2,000,000 of availability under the KPR Companies' credit line after taking into account such payments. Such payments were made to Mr. Rubin on November 26, 1997. In addition, the Loan Agreement and the Subordination Agreement permit the KPR Companies to make continued regular payments of interest on the subordinated debt and to further reduce principal on a quarterly basis, commencing with the first quarter of 1998, in an amount up to 50% of the cumulative consolidated net income of both borrowers, reduced by net losses of the borrowers during such period. During 1998, aggregate principal payments of $250,000 were made. No payments on this subordinated debt have been made to date in 1999. On April 20, 1999, the Company formalized a plan to sell two of its businesses, the Branded division and the Off-Price and Action Sports division, in order to focus exclusively on its e-Commerce business. Management expects that these sales will result in substantial proceeds to the Company. The Company has made certain commitments with respect to developing the internet businesses of several sporting goods retailers. The Company is going to have to raise significant capital to meet these commitments and to continue to support its discontinued operations until disposition. The Company is currently evaluating several proposals to raise additional capital and expects to raise such capital by the end of the second quarter of 1999. There are, however, no assurances that the Company will be able to raise such capital. YEAR 2000 The Company recognizes the importance of advanced computerization in maintaining and improving its level of service, internal and external communication and overall competitive position. The Company maintains a management information system that provides, among other things, comprehensive customer order processing, inventory, production, accounting and management information for the marketing, selling, manufacturing and distribution functions of the Company's business. The Company has created a Year 2000 project team which is coordinating efforts to evaluate, identify, correct or reprogram, and test the Company's existing systems Year 2000 compliance. The Company is currently enhancing its key information systems to improve their functionality and increase performance. These upgrades will also make these applications Year 2000 compliant. The Company expects to finish this upgrade prior to the end of the second quarter of 1999 and does not expect the costs of such steps to have a material impact on the Company's results of operations, financial position, liquidity or capital resources. The Company is in the process of developing a contingency plan in the event that the above modifications do not result in Year 2000 compliance. In addition to making its own systems Year 2000 compliant, the Company is in the process of contacting its key suppliers and customers to determine the extent to which the systems of such suppliers and customers are Year 2000 compliant and the extent to which the Company could be affected by the failure of such third parties to become Year 2000 compliant. The Company cannot presently estimate the impact of the failure of such third parties to become Year 2000 Compliant. See "Risk Factors - Risks Relating to Year 2000 Compliance" in the Company's most recent Annual Report on Form 10-K/A. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK There have been no significant changes in market risk for the three months ended March 31, 1999. See the information set forth in Item 7A of the Company's Annual Report on Form 10-K/A for the year ended December 31, 1998. -13- PART II -- OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS Not Applicable. ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS Not Applicable. ITEM 3. DEFAULTS ON SENIOR SECURITIES Not Applicable. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not Applicable. ITEM 5. OTHER INFORMATION Not Applicable. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 10.19*/(1)/ Employment Agreement dated March 28, 1999 by and between the Registrant and Michael Golden. 10.40-G/(1)/ Consent and Amendment No. 7 to the Loan Documents by and among KPR Sports International, Inc., RYKA Inc. and Foothill Capital Corporation. 27.1 Financial data schedule for the three-month period ended March 31, 1999 (electronic filing only). * Management contract or compensatory plan or arrangement. /(1)/ Previously filed. (b) Reports on Form 8-K The Company filed a Current Report on Form 8-K/A (Amendment to Form 8-K dated May 12, 1998) on February 8, 1999 containing the Gen-X Companies historical financial statements and Company pro forma financial information. -14- SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, hereunto duly authorized. GLOBAL SPORTS, INC. DATE: March 21, 2000 BY: /s/ Michael G. Rubin -------------------------- MICHAEL G. RUBIN Chairman of the Board & Chief Executive Officer DATE: March 21, 2000 BY: /s/ Jordan M. Copland __________________________ JORDAN M. COPLAND Executive Vice President & Chief Financial Officer -15-